Financial fragmentation in the Euro area

Christophe Blot (), Jerome Creel, Paul Hubert () and Fabien Labondance
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Christophe Blot: OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po
Paul Hubert: OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po

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Abstract: Fragmentation has increased since the financial crisis. It remains, though, that differences in cross-border financial flows have been strong across Euro area member states since the creation of the Euro. We show that the transmission of ECB policies to the interest rates on loans to non-financial corporations is quite uneven in the Euro area: the pass-through is much stronger in the periphery than in the core since the Global financial crisis. Consequently, the ECB is able to reduce the spread between the periphery and the core. We also show that the monetary policy transmission to NFC rates is stronger when fragmentation is low. Limiting fragmentation is thus crucial to improve the interest-rate channel in the Euro area . We argue that TLTRO II and QE should be targeted towards peripheral countries in order to limit Euro area fragmentation. Moreover, institutional improvements to make banking systems more homogenous across Euro area should be advocated.

Date: 2016-09
Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03471879
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Published in [Research Report] Parlement européen. 2016

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Working Paper: Financial fragmentation in the Euro area (2016)
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